Month: December, 2013

Unlock the Value of Your Medical Fitness Center

With hospitals increasingly focused on core businesses, there is a growing trend to sell and lease back a variety of non-core real estate, including medical office buildings, surgery centers and senior housing. Which raises the question, should your hospital capitalize on the real estate value of your medical fitness center? If it is an underperforming asset, the organization may consider selling it and developing a strategy to achieve the financial results required for future disposition.

During the last two decades, more than 700 community hospitals in the United States have developed medically integrated fitness centers or wellness centers. These hospitals have invested more than $3 billion in real estate. While many centers have produced sizeable long-term economic benefits, most have drained financial resources. Often rationalized as a community asset or a marketing channel for the hospital, many of these retail service businesses simply have lost their energy and failed to produce long-term economic benefits.

Within the last 15 years, the healthcare real estate market has exploded. Both public and private real estate investment trusts (REITs) as well as private investors have acquired all types of healthcare real estate, including such special-purpose facilities as free-standing emergency rooms. The movement away from the fortress mentality of owning everything has been steady as executives have sought to capture values in these locked-up assets.

To benefit from this trend, owners must significantly improve financial performance to achieve a net operating income comparable with other medical real estate holdings. For medical fitness centers, we project an outside investor will value a facility at a 9 to 10 percent market capitalization rate of net operating income. This rate is greater than the target for a medical office building (7 to 8 percent) due to the special-purpose nature of the medical fitness center facility. Depending on your organization’s credit, both targets may be reduced under a sale/leaseback transaction.

If your center is not earning at least an 8 to 10 percent return on total project costs, it will take strategic planning, execution and communication as well as time to significantly improve financial performance. To achieve the positive consecutive returns that will allow an outside investor to value a potential acquisition can easily take at least three years.

For those organizations with viable medical fitness centers interested in capitalizing on their real estate values, the timing couldn’t be better. With real estate capital inflows at record levels and portfolios shifting to proven income-producing acquisitions, investors are becoming more interested in medical fitness centers. As with other real estate transactions, proper due diligence documentation and esthetic property improvements should be completed prior to solicitation.

As management consultants, MedFit Partners brings the focus to achieve financial results: we adhere to proven procedures and training programs to improve and empower staff performance, and we plan and execute strategic initiatives through powerful communications. MedFit Partners helps you find the answers needed to achieve your goals. We offer property evaluation services as well as placement of your transaction.